What is CBDC and how does it work?

Table of Contents

What is a CBDC?

CBDC stands for Central Bank Digital Currency, a digital currency issued by a central bank. CBDC is a form of electronic cash that is issued and controlled by a central bank, rather than by private financial institutions such as commercial banks.

Central Bank Digital Currency is a response to the growing demand for secure and convenient digital payment methods, as well as to the developing blockchain technology and cryptocurrencies. However, unlike cryptocurrencies, CBDC is issued and controlled by a central bank, which means it is considered safer and more stable compared to private cryptocurrencies.

Central Bank Digital Currency can be issued in various forms, such as digital tokens or electronic account balances, and can be used to make digital transactions using smartphones, payment cards and other electronic devices.

In which countries is work on CBDC most advanced?

Which countries are most advanced in CBDC research? Central Bank Digital Currency research and development is ongoing in many countries around the world, but not all are at the same level. Here are some of the countries where research is at the highest level:

China. The People’s Bank of China, the country’s central bank, is one of the countries with the most advanced CBDC research. The project, called Digital Currency Electronic Payments (DCEP), has already passed its first trials and is currently being implemented in several regions of China.
Sweden. Sweden’s central bank, the Riksbank, has been studying CBDC for several years and plans to launch an electronic currency project in 2021.
Bahrain’s central bank, the Central Bank of Bahrain, is testing a Central Bank Digital Currency called “Aber” in cooperation with the Arab Monetary Fund and the UAE Central Bank.
Tunisia. Banque Centrale de Tunisie, the central bank of Tunisia, became one of the first central banks in the world to launch a CBDC called “e-Dinar”.
USA. The US central bank, the Federal Reserve Board (FRB), is studying CBDCs and has expressed the view that further research in this area is needed.
Europe. The European Central Bank (ECB) has announced that a working group will be established in 2020 to study the feasibility of a euro Central Bank Digital Currency. It should be noted that work on the CBDC is at different stages of development and at different stages in different countries. Some countries have just started research and development, while others are already ready to implement Central Bank Digital Currency.

What are the advantages and disadvantages of CBDCs?

CBDCs, or digital currencies issued by the central bank, have their advantages and disadvantages. I’ve outlined some of them below:

Advantages of CBDCs

Security. CBDCs provide greater payment security than traditional forms of money, such as banknotes or coins, because transactions are recorded on a decentralized database, making counterfeiting and theft impossible.
Inflation control. Central banks can control inflation by regulating the supply of digital money in circulation, which helps maintain price stability.
Ease and speed. Transactions made with central bank-issued digital currencies are much faster and easier than traditional banking transactions, which can speed up and facilitate the movement of money between different businesses.

Disadvantages of CBDCs

Lack of anonymity. Central bank-issued digital currencies can pose privacy risks, as all transactions are recorded and stored in a decentralized database, allowing central banks and governments to track and audit payments.
Lack of accessibility for those without internet access. The requirement to have Internet access can be a problem for those without access to the technology.
Threat to traditional financial institutions. The introduction of central bank-issued digital currencies could increase competition for traditional financial institutions, such as banks, which could affect their profitability and stability.

It is worth noting that the advantages and disadvantages of CBDCs may vary depending on the specific conditions in a given country. It all depends on the context and needs of the economy.

CBDC vs Bitcoin

CBDC (Central Bank Issued Digital Currency) and Bitcoin are very different, although both are related to blockchain technology.

CBDC is a digital form of money issued and managed by a central bank; Central Bank Digital Currency operates on the basis of trust in the central bank and is usually backed by the government; CBDC is intended to complement, not replace, existing forms of money such as banknotes and coins.

Bitcoin, on the other hand, is a cryptocurrency powered by blockchain technology that allows for secure and decentralized exchange of value between different individuals without the need for an intermediary. Bitcoin is decentralized, meaning that it is not controlled by any institution, but only by the network of users who use it.

The main differences between Central Bank Digital Currency and bitcoin are as follows

Issuer. CBDCs are issued by a central bank, while bitcoins are created and controlled by a network of users.
Value. The value of Central Bank Digital Currency is tied to government money and is usually backed by the government, whereas the value of bitcoins is determined by supply and demand.
Purpose. CBDCs are intended to complement existing currencies such as banknotes and coins, while bitcoins are intended to provide an alternative form of payment and store of value.
Control. Central Bank Digital Currency are controlled by central banks that can regulate their supply and exchange, while bitcoins are decentralized and controlled by a network of users.

In summary, CBDCs and bitcoins are both related to blockchain technology, but are very different: CBDCs are money in digital form issued by a central bank, while bitcoins are cryptocurrencies that operate through decentralized exchange of value between users. If you want to know how and where to buy cryptocurrencies and tokens for FIAT currencies read arcitle.

Leszko Dalek

For more than 6 years, he has been interested in cryptocurrencies, tokens and blockchain, as well as other modern technologies like artificial intelligence. I have been actively investing for more than 10 years. I have developed hundreds of highly substantive articles and publications for this and many other external portals.